Modern estate planning uses several different legal devices for accomplishing the intentions of the person making the estate plan. One of the most useful and effective devices is a trust.
The general idea of a trust
The creation of a trust is fairly simple. The owner of the assets, called the “grantor” or “settlor,” signs a legal document that transfers possession of some or all of the settlor’s assets to another person, called the “trustee,” whose job it is to manage the assets to preserve or increase their value as specified in the trust document. The assets of the trust can be used for almost any lawful purpose, but the common uses are estate planning, charitable giving, tax planning and health care planning. When the trust expires, the assets are distributed to the persons designated by the settlor; these persons are usually called “beneficiaries.”
Different kinds of trusts
Trusts are usually divided into two categories: a trust that takes effect while the settlor is alive (an “inter vivos trust”) or a trust that takes effect when the settlor dies (a “testamentary trust”). An inter vivos trust can remain in effect after the settlor’s death. In such cases, the assets remain in the possession of the trustee until they must be distributed as specified in the trust document. In this way, the settlor can control the receipt of assets by the beneficiaries until they reach a specified age or satisfy some other condition.
A special needs trust is a special kind of inter vivos trust that is used to pay living and health care expenses for a person who suffers from a severe disability.
Another type of special use trust is the “spendthrift trust” in which the trust assets cannot be used by the beneficiary until the beneficiary demonstrates the ability to properly manage money.
Some types of trusts may have adverse income tax consequences for either the settlor or a beneficiary. A trust may not be set up to accomplish an illegal purpose or to support a particular political philosophy—such as segregation of public schools—that is deemed to be contrary to acceptable public policy.
Getting sound legal advice
While the mechanism for establishing a trust is relatively simple, an experienced estate planning attorney should be retained to ensure that the trust document does not contain inadvertent errors or provisions that might invalidate the trust.